Market Structures How do producers manipulate a market to get what they want?

Perfect Competition Producers unable to manipulate market at all Four Characteristics Buyers and sellers act independently Sellers offer identical products Buyers are well informed about products Sellers can exit/enter market easily

Monopolistic Competition NOT A MONOPOLY Perfect competition, but products aren’t identical Differentiate- develop & point out differences between products Product differentiation- real or perceived differences that set products apart Examples- shoes, jeans, Coke vs. Pepsi

Monopolistic Competition Non-price Competition- competition based on something other than price Examples: creating “brand names” Why do companies do this? Increases profits: customers demand only their product and can charge more

Imperfectly Competitive Markets Oligopoly- market structure in which a few large sellers control most production 3 characteristics Few large sellers: 3-4 control 70% or more Sellers offer identical or very similar products Other sellers can’t enter market easily Start-up, Govt. regulation, consumer loyalty

Imperfectly Competitive Markets Oligopoly cont’d Often use interdependent pricing- being very responsive to or dependent on the pricing of their competitors Often has price leadership- one of the largest sellers takes lead in setting prices Can have price war- one firm aggressively undercuts price to gain market share

Imperfectly Competitive Markets Oligopoly continued Firms sometimes may use collusion- illegal, secret agreements to set prices or production levels Firms may form a cartel- openly organize a system of price-setting and market sharing Illegal in the U.S. but legal in some others

Monopoly Monopoly- single seller controls all production of a good or service Characteristics: Single seller No close substitutes Others can’t enter market easily Why would govt. allow some to exist?

Monopolies Types of Monopolies Natural monopoly- exists when competition is inconvenient/impractical Example: utilities like gas, electric, water Often have markets that benefit from economies of scale- scale or size allows one producer to operate more efficiently than if those resources were divided

Monopolies Geographic Monopoly- a market’s potential profit is so limited by its location that only a single seller enters the market Examples: small town grocery/hardware Technological Monopoly- a producer creates a new product or new way of making an existing product Example: drug companies

Monopolies Firms can control who sells or has access to their products by two means Patent- grants a company exclusive rights to produce or sell an invention for a limited time Copyright- Artists/companies given exclusive rights to perform, duplicate, or use their creative works

Monopolies Government Monopoly- market in which the govt. is only seller of a product Public Goods Examples: roads, bridges, military

Monopolies Limits on Monopolies Consumer demand- if prices go high enough quantity demanded can go to zero Potential Competition- if prices go high enough, incentive is strong enough to bring in competitors Govt. Regulation- monitor quality, quantity, and prices and protect consumers

Market Regulation Laissez-faire- French term (“let do”), hands- off govt. philosophy toward economy Anti-trust Legislation- designed to monitor and regulate big business, prevent monopolies from forming and break up existing ones Price Discrimination- offering different prices to different customers under the same circumstances